The Turkish Central Bank’s (CBRT) Monetary Policy Committee (MPC) will announce its August decision tomorrow. The market, which does not expect a change in the policy rate of 50 percent, will be watching the signals in the MPC text.
As interest rate cut discussions heat up, the tight monetary policy rhetoric in the previous MPC decisions and the speeches of the governor and vice governors remain. However, the August MPC decision is expected to convey a message on the conditions rather than the timing of a rate cut.
The August meeting will be held on Tuesday, not Thursday as usual, as Central Bank Governor Fatih Karahan is attending the Jackson Hole meetings. Surveys are in favor of leaving the policy rate unchanged at 50 percent.
After last year’s elections, the Central Bank raised the policy rate by 4150 basis points since June 2023, the last in March 2024. Both the president and the MPC texts suggest that the tight monetary policy stance with a policy rate of 50 percent will continue until a permanent decline in inflation is achieved.
Rate cut debate flares up
The Central Bank forecasts inflation to be 38 percent at the end of the year, while the year-end forecast for 2025 is 14 percent. The market considers the 2025 forecast aggressive and emphasizes that the course of interest rate cuts is fundamental for realizing this forecast. For the end of 2024, the market’s forecasts are shaped around 42 percent. However, in both surveys and discussions, the market is concentrating on the first policy rate cut by the end of this year. Some economists point to the first quarter of 2025. Four economists surveyed by Reuters indicated that the first rate cut will be made in October and four in November. Two economists expect the first rate cut to take place in December. Five economists said they expect the Central Bank to make its first rate cut in the first quarter of 2025.
Emphasizing the determination in the disinflation process in the third inflation report of the year, Central Bank Governor Fatih Karahan stated that the tight stance will need to be maintained for a long time by keeping inflation forecasts unchanged for the next three years. Karahan said, “This does not mean that interest rates will never come down in this process. The tight stance can be maintained when we enter an interest rate cut cycle, but we will need to maintain the tight stance until inflation approaches our medium-term target.”
New wording may be included in the MPC text
Banking sector sources emphasized that the August meeting would shed some light on potential rate cuts and that they attach more importance to the August meeting than to the June and July meetings. Reminding that the Central Bank closed the door on an early rate cut at the August and September meetings, the sources pointed out that the Central Bank also gave guidance on the potential timing of the rate cut, refraining from giving clues. The sources pointed out that current pricing suggests only a modest rate cut for 2024 and that the Central Bank may add new wording to the MPC text at this meeting to closely manage and guide expectations.
Not when but under what circumstances
However, rather than indicating the timing of the first rate cut, this expectation may clarify the conditions for rate cuts, sources said, and therefore the guessing game in the market will likely continue. Reminding that the decline in inflation will probably slow down after September as the base effects disappear, the sources pointed out that the Central Bank should be cautious in its next rate cuts to reach the rather aggressive end-2025 target of 14 percent. The sources said that the stickiness of inflation in the first half of 2025 could lead to more measured rate cuts than the market had expected.
